BKH

Black Hills Corporation 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Black Hills Corporation, a diversified energy company operating in the United States. The report covers the three-month period ended March 31, 2010. The company operates through two primary business groups: Utilities (Electric and Gas) and Non-regulated Energy (Oil and Gas, Power Generation, Coal Mining, and Energy Marketing).

Key Financial Metrics

Note: Debt figures reflect significant refinancing and new borrowings in 2010 compared to 2009.

Material Changes vs. Prior Period

• Income Growth: Net income increased 19% year-over-year, driven primarily by a $28.1 million improvement in the Oil and Gas segment and a $2.2 million increase in Gas Utilities earnings.
• Oil and Gas Segment: The Q1 2009 results were significantly depressed by a $43.3 million non-cash ceiling test impairment charge due to low commodity prices. Q1 2010 had no such impairment, resulting in a stark contrast in segment profitability.
• Power Generation: Income decreased $16.1 million compared to Q1 2009, which included a one-time $16.9 million after-tax gain from the sale of a 23.5% ownership interest in the Wygen I facility.
• Corporate Segment: Reported a loss of $5.0 million in Q1 2010 compared to income of $5.5 million in Q1 2009. This shift was largely due to a $3.0 million unrealized mark-to-market loss on interest rate swaps in 2010 versus a $14.8 million gain in 2009.
• Cash Flow: Operating cash flow decreased $111.4 million year-over-year, primarily due to changes in working capital (specifically materials, supplies, and fuel) and the absence of the non-cash impairment adjustment in 2010.

Outlook, Risks, and Management Commentary

• Capital Expenditures: The company expects total capital expenditures for 2010 to approximate $477.4 million. Major projects include the construction of 180 MW of gas-fired generation for Colorado Electric and transmission upgrades.
• Financing: On April 15, 2010, the company terminated its $525 million Corporate Credit Facility and entered into a new $500 million three-year Revolving Credit Facility. The company intends to maintain a consolidated debt-to-capitalization level between 50% and 55%.
• Regulatory Matters: Several rate cases are pending or recently approved, including a $22.9 million revenue increase request for Colorado Electric and interim rate increases for Black Hills Power in South Dakota.
• Risks: Key risks include commodity price volatility (mitigated by hedging), interest rate fluctuations, regulatory outcomes, and the ability to access capital markets for large infrastructure projects. The company noted that a significant deterioration in credit ratings could impact financing costs and availability.
• Unusual Items: Q1 2010 included a $1.7 million after-tax gain on the sale of Nebraska Gas assets due to city annexation. Q1 2009 included discontinued operations income of $0.8 million related to the IPP Transaction.

Investor Verification Checklist

• Debt Structure: Verify the terms and covenants of the new $500 million Revolving Credit Facility entered into in April 2010.
• Capital Projects: Monitor progress and cost overruns on the $240-$265 million Colorado Electric gas-fired generation project.
• Commodity Hedging: Review the impact of mark-to-market adjustments on interest rate swaps and commodity derivatives on future earnings volatility.
• Regulatory Approvals: Track the status of pending rate cases for Colorado Electric, Black Hills Power (Wyoming), and Nebraska Gas.
• Oil & Gas Reserves: Assess the sensitivity of the Oil and Gas segment's earnings to future commodity price fluctuations, given the absence of impairment charges in the current period.